- Eric Walter, CFP®
Risk Tolerance Recalibration
Over the last decade, as we progressed further from the Financial Crisis, investor risk tolerance has continued to “increase” but for some it was a mirage. Even though we have been expecting volatility (from an election year not a pandemic), the corona virus and subsequent volatility has led many to hit the reset button and take another look at their appetite for risk.
When the market goes up steadily, especially over a long period of time, investors feel increasingly positive, leading to the desire to get in on the action and not “miss out”. This excitement can skew away from the amount of risk an investor can actually handle. Conversely, when the market is down, investors may get fearful and want to sell. This effectively creates a “buy high, sell low” strategy. We know logically this is the wrong approach but it is human nature.
This can be remedied by focusing not on the dollar or percent gain/loss in your portfolio at any given point in time but the percent chance of success you have of reaching your goals. When we create a Financial Plan, we stress test your Needs, Wants, &, Wishes by simulating 1000 trials of possible market outcomes. By reframing the idea of success, you can fight the behavior you know is against your best interest.
For example, your Financial Plan gives you a 90% chance of meeting all your goals but then the market goes down 20%. Without proper context (and even with), this can be an alarming descent. If we retest your portfolio however, and you have an 88% chance of success, you know you are still on the right track. There are many factors that go into this determination but if you would like this peace of mind, let me know and we can start the process for your Financial Plan.